Solvency of a DB pension plan

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
brucecohen
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Re: Solvency of a DB pension plan

Post by brucecohen » 09 Aug 2015 08:57

Bylo Selhi wrote:
brucecohen wrote:Aside from fiduciary duty, a DB plan's funded status is a line item on the company's income statement. A surplus increases net income. A deficit reduces it.
But this too is subject to gaming. As Buffett warned before the financial crisis, e.g. Pension Investment-Return Assumptions Unrealistic, Says Buffett. Has this been addressed in post-2008 reforms ?
I don't know but it wasn't an issue in Canada where DB plans have been run much more conservatively and been more tightly regulated. Also, you'll recall that Buffett's biggest complaint was that corporate directors ignored their companies' pension plans -- he wrote that none of the boards on which he had served had ever reviewed the plan assumptions. That's obviously no longer the case.
or are we still at the mercy of their accountants (and CEO's greed)
Yes. But many, and maybe a growing number of, people in the pension world now believe actuaries should be hired and paid by the pension fund, not the plan sponsor. That's long overdue. I don't know whether it's voluntary or now required, but I've noticed that pension fund annual reports now include statements on whether the actuarial firm provides any other services to the plan sponsor.

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Re: Solvency of a DB pension plan

Post by longinvest » 09 Aug 2015 09:07

brucecohen wrote:How is that different than being retired for 10 years on a DC pension or RRSP and getting hit by a huge market or interest rate crash? Consider the plight of a DC or RRSP pensioner who retired in the early '90s and based his/her planning on the then-reasonable assumption of 8-10% interest rates. Remember: we know about DB deficits because the law requires that valuations be done at least every three years and publicly reported. There's no such requirement for DC plans and RRSPs.
You're comparing a pension to a portfolio of risky assets; that's not the right comparison to make. The appropriate comparison is with a similar yet more expensive SPIA (due to profit margins and self-selection). In principle, a pension should be no riskier than a SPIA and should be cheaper. The Nortel and Algoma examples show that, while a pension is effectively cheaper, it is riskier than a SPIA (e.g. it can lead to a worse outcome in the rare case when things go bad). This is appalling. It goes contrary to the whole idea of having a DB pension plan to start with.

People might not like DC plans, yet at least a DC plan does not give a false illusion stable outcome.
brucecohen wrote: In any event, I think you're over-dramatizing the risk. The fact that only two company failures -- Nortel and Algoma -- get cited when DB pension risk is discussed is a testimony to how well plans have done. Again, bear in mind that much of our view of DB pension problems is skewed by events in the US.
I don't think that I am. These examples should not exist, or at least, laws should have been changed as to prevent to a reasonable extent similar situations in the future. As far as I can see, except maybe in Ontario (PBGF)*, a pensioner remains vulnerable to a post-retirement failure of his pension plan and former employer.

* Apparently, it only protects the first $1,000 per month, half the Assuris protection for one insurer.
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brucecohen
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Re: Solvency of a DB pension plan

Post by brucecohen » 09 Aug 2015 09:17

Insomniac wrote: My pension plan used to pay our monthly MSP premiums and Blue Cross premiums for both pensioner and spouse. A few years ago, the plan announced that the pensioners would have to pay their own MSP premiums and the Blue Cross premiums for the spouse. This change cost the pensioner approx $150 per month. A big hit for those who are just getting by.
Post-retirement medical insurance is a ripe area for cutbacks because it's not covered by pension legislation.
The College Pension Plan has had issues with their inflation adjustment account and has capped the indexing at 1.83%. Fortunately for their pensioners, we are in times of low inflation. e.g. If inflation was say, 5%, the pensioners would only get a 1.83% increase.
The BC College Pension Plan website says the COLA cap is set every three years based on an actuarial review of the plan's funded status and projection of inflation. So, presumably, the cap would be higher in a 5% inflation environment. Note that 5% inflation implies higher long-term bond rates, the key data item in valuing a DB plan. As the average long-term bond rate goes up, the projected cost of the pension liabilities goes down. So with 5% inflation the plan would likely be in surplus and able to afford a higher COLA. FWIW, years ago the chief actuary of the Ontario Teachers' Pension Plan told me that full automatic indexing increased the cost of their pensions by about 25% OTPP has since adopted conditional indexing for credits earned after 2009. That ties indexing to the plan's funded status so that it's reduced when the plan is in the red and catch-ups are due when the fund status improves. I don't know about the BC college plan, but Ontario's plans are jointly sponsored by govt and the members through their unions. So the more generous the benefits promised, the more members must pay.

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Re: Solvency of a DB pension plan

Post by AltaRed » 09 Aug 2015 10:42

brucecohen wrote:Post-retirement medical insurance is a ripe area for cutbacks because it's not covered by pension legislation.
Additionally, as far as I know, such retirement benefits have no connection to the DB plan either. These are provided/funded/subsidized by the employer. My former employer provides me with subsidized extended health benefits (including International medical insurance) and surprisingly group life declining term to age 75. I know these could be taken away at any time and have nothing to do with the DB plan. Indeed, the most valuable benefit to me is the International medical insurance (I don't have to buy that when I travel).
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Re: Solvency of a DB pension plan

Post by kcowan » 09 Aug 2015 10:50

AltaRed wrote:Indeed, the most valuable benefit to me is the International medical insurance (I don't have to buy that when I travel).
In a prescient move, my Megacorp removed that provision in 1991 (no coverage outside of Canada). Some of my fellow retirees (who retired from Big Oil) are amazed at how much that insurance costs these days. And I do not travel to the US!
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Re: Solvency of a DB pension plan

Post by SQRT » 10 Aug 2015 15:49

AltaRed wrote: My former employer provides me with subsidized extended health benefits (including International medical insurance) and surprisingly group life declining term to age 75. I know these could be taken away at any time and have nothing to do with the DB plan. Indeed, the most valuable benefit to me is the International medical insurance (I don't have to buy that when I travel).
Likewise. This is also my best retirement benefit. Because it is a group plan no underwriting issues,eg pre existing conditions, etc. Don't even recall filling out a medical questionnaire. Claimed 2 significant expenses, no issues.

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Re: Solvency of a DB pension plan

Post by Shakespeare » 24 Jun 2017 18:17

From behind the G&M paywall:

PressReader.com - Connecting People Through News: No severance pay for Sears Canada staff
The ailing retailer confirmed on Friday it doesn’t intend to pay severance to those laid-off staff as it scrambles to revive its flagging fortunes amid a fast-changing retail landscape....

[And:]

The previous day, Sears had asked Ontario Superior Court to allow it to stop contributing to its defined-benefit pension for current and retired staff as well as stop paying medical, dental and life-insurance benefits for 18,000 retirees, ranging from former store salespeople to top executives.
Lots of tough times out there from this. :(
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Re: Solvency of a DB pension plan

Post by kombat » 10 Oct 2017 11:28

More on the Sears disintegration:

'A complete joke': Laid-off Sears workers say hardship fund cash amounts to nothing after EI cut
Laid-off Sears Canada workers say the hardship fund set up to help them is pointless because any payout counts as income, so it's deducted from their employment insurance benefits.

"You have to give it back. We are getting absolutely nothing," says Vera Asselin, a former inventory analyst at the company's head office in Toronto.

"It's a complete joke."

...

To help make ends meet, she applied for the hardship fund to cover the cost of expensive medications needed for her family.

She was accepted, but then was dismayed to discover she must report the money as income because she's collecting EI.

"Whatever's being given to me in the hardship fund is only going to be deducted, so at the end of the day, it's a dollar for a dollar," she says.

"I'm not any ahead. I'm disappointed, I'm angry, I'm frustrated over this whole situation."
Am I missing something? This is how EI has always worked. You can't collect EI while you're still collecting an income. It seems this woman is complaining about not being allowed to "double-dip." This is nothing new, it's nothing unique to Sears employees, and as far as I can tell, it's not even "unfair." Of course you can't collect both EI and an income simultaneously.

It seems this woman is under the impression that EI is a welfare program rather than an insurance program. She worked there for 33 years, and somehow still failed to plan for the eventuality that she may one day be laid off. I know - the demise of retail is a shock to everyone. Who could possibly have seen this coming (besides everyone aware of what Amazon has been up to for the past quarter-century)?

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Re: Solvency of a DB pension plan

Post by Descartes » 10 Oct 2017 13:04

To be fair to the former Sears worker, she is NOT employed and thus she IS eligible for EI. The hardship fund is not employment income (it may be classified as a form of severance, perhaps).
However, it is STILL income that will reduce her EI benefits as per the rules.

For reference, see:
https://www.canada.ca/en/services/benef ... #severance
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Re: Solvency of a DB pension plan

Post by Chuck » 10 Oct 2017 15:38

This made me laugh (with dismay):
Service Canada simply needs to recognize the fund payments as "relief grants," which don't have to be declared as income for EI recipients, she says.
So it boils down to: semantics. Gotta love tax codes.

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Re: Solvency of a DB pension plan

Post by OnlyMyOpinion » 11 Oct 2017 11:38

kombat wrote:
10 Oct 2017 11:28
More on the Sears disintegration:...
Am I missing something? This is how EI has always worked. You can't collect EI while you're still collecting an income. It seems this woman is complaining about not being allowed to "double-dip." This is nothing new, it's nothing unique to Sears employees, and as far as I can tell, it's not even "unfair." Of course you can't collect both EI and an income simultaneously.
It seems this woman is under the impression that EI is a welfare program rather than an insurance program. She worked there for 33 years, and somehow still failed to plan for the eventuality that she may one day be laid off. I know - the demise of retail is a shock to everyone. Who could possibly have seen this coming (besides everyone aware of what Amazon has been up to for the past quarter-century)?
No I don't think your missing anything :roll: :roll:. Like most retail employees, predominantly women, probably only a high school education, or a stay-at-home-mom that went back into the work force after kids reached school age (missed the current trend of gov't paying to look after the kids), or perhaps a recent immigrant trying to get ahead.

Why didn't they save for a rainy day, or bail from Sears when they saw the 'writing on the wall'? They could have even availed themselves to the wisdom on FWF for free to make the right choices. Why should they expect legislated severance to be paid once Sears goes under CCAA? Just because senior executives feathered their nest in spite of years of management missteps, why should they expect to be in line with suppliers? Cripes, they were probably even taking smoke breaks all these years.

Clearly money from a hardship fund - in lieu of legislated severence - should be clawed back from their unemployment insurance. To do otherwise would be grossly unfair to you and I. We have governments currently in place that are fiscally responsible - they do not waste taxpayer's money on bailouts. Why would they make any allowance for thousands of retail employess thrown out of work who should have known better.

Beyond whining about a few hundred dollars from a hardship fund, I certainly hope they weren't gullible enough to assume their DB pension would be funded and intact when they finally retire. Surely they know that along with Sears, 30% of similar pensions in Ont & Que are underfunded:
https://globalnews.ca/news/3641771/sear ... sion-plan/. As the article concludes, hopefully these Sears employees realize it was always just a 'best efforts pension' and they have saved sustantial portfolios to look after themseves in retirement.

Added: Sure hope they spend those unemployment dollars though. This country needs these retail/dollarama shoppers to prop up our economy until resources can be developed again.

<remove tongue from cheek>

Full disclosure: I have family who worked at Sears in the past but left several years ago (no pension credits), and a cousin who is retired with a Sears DB pension.

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Re: Solvency of a DB pension plan

Post by kombat » 11 Oct 2017 12:32

OnlyMyOpinion wrote:
11 Oct 2017 11:38
Why should they expect legislated severance to be paid once Sears goes under CCAA?
I think they do expect to receive the severance pay they're legally entitled to. That seems pretty reasonable to me. After all, it's the law. But if the money is already gone, well, how do you get blood from a stone?
OnlyMyOpinion wrote:
11 Oct 2017 11:38
Just because senior executives feathered their nest
"Feathered their nest?" You mean, got paid for their work? Much like the people further down the chain? Why would you choose such language, unless to incite class envy?

The magnitude of the paycheck is irrelevant. People are entitled to be paid for work they do. Whether it's a part-time cashier, or an upper level executive. Framing the issue in terms of one group "feathering their nest," while the others are helpless victims, is destructive.
OnlyMyOpinion wrote:
11 Oct 2017 11:38
why should they expect to be in line with suppliers?
Because there are differences between employees, creditors, suppliers, and shareholders, and there are rules that dictate the order in which they are given priority with regard to their claims to assets.Ignoring/changing the rules would have implications with respect to the interest rate at which businesses can hope to borrow money (you change the risk, you change the interest rate). Why should employees automatically be at the front of the line? Because they're losing their jobs, whereas the bondholders are a bunch of rich millionaire investors, and are thus more sympathetic parties?
OnlyMyOpinion wrote:
11 Oct 2017 11:38
Clearly money from a hardship fund - in lieu of legislated severence - should be clawed back from their unemployment insurance.
Yes, actually! Mainly because if that legislated severance HAD been paid, it too would have ALSO been (rightfully) considered income for the purposes of calculating an EI benefit. Why should this payout receive preferential treatment? Why should employees be allowed to collect EI prematurely? Why should former SEARS employees be granted special exemption over any other laid-off employee in Canada? The rules are the rules for everybody, not just the people who don't run crying to the "Go Public" reporter at CBC or plaster it all over Facebook.

Why should the employees receive EI benefits they wouldn't otherwise be entitled to, just because their severance money came from a source other than their direct employer?
OnlyMyOpinion wrote:
11 Oct 2017 11:38
To do otherwise would be grossly unfair to you and I.
To treat SEARS employees differently than every other employee in Canada WOULD be grossly unfair to you and I (having been one of those laid off employees myself, at one time, and not being permitted to have EI "overlook" my 4 month severance payout).
OnlyMyOpinion wrote:
11 Oct 2017 11:38
We have governments currently in place that are fiscally responsible
Irrelevant. All that matters are the rules.
OnlyMyOpinion wrote:
11 Oct 2017 11:38
They do not waste taxpayer's money on bailouts.
This isn't a bailout. This is a longstanding, standardized policy regarding employees who are laid off. It's the same rules for everybody. You continue to try to frame this issue in the most inflammatory manner possible.
OnlyMyOpinion wrote:
11 Oct 2017 11:38
Why would they make any allowance for thousands of retail employess thrown out of work who should have known better.
They shouldn't. They didn't for Nortel, they didn't for JDS, they didn't for GM, for Nestle, for Bre-X, they won't for Bombardier, for the newspapers, for Radio Shack, for anyone. Nor should they.

Regarding pensions, there are strict rules dictating funding levels to ensure they remain solvent. In cases where pensions are underfunded and there is a shortfall, there are government programs in place to help "top up" recipients that are being shortchanged. And that has nothing to do with whining about being prohibited from collecting EI and a severance payment simultaneously.

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